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We are currently experiencing one of the longest bull markets in history. Yet every expansion is followed by a recession. The data seems to indicate that a stock market crash may be coming sooner than expected. Thus, we should all prepare for this inevitable outcome!
Many people see a crash as a gloomy time of economic depression and money loss. While this may be true, it doesn’t have to! By following the advice below, you will be provided with the necessary tools to get rich during a stock market crash.
A stock market crash might be approaching faster than expected

Control your emotions and adopt the proper perspective

The most common mistake people make when a market crash hits are panicking. Indeed, losing control of emotions is the fatal error to avoid during harsh times in the market!
The stock market is largely a psychological game that shifts between two faces. Firstly a phase of greed where investors are optimistic and want to profit from rising prices. Secondly, a phase of fear when a crash or correction hits and everyone starts to sell their positions because they are afraid that prices will continue to fall.
So how can we avoid this? The first step is to understand how the stock market works. It’s essential to grasp the functioning of the business cycle to know that a crash is always followed by an expansion!

The business cycle is composed of 4 phases: expansion, peak, recession/depression and through.
Peter Lynch, the American investor and manager of the Magellan Fund at Fidelity Investments between 1977 and 1990 said: “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”

When hit with recessions, you must stay the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries!
So a wise option would be to either hold onto the positions and wait for the expansion to arrive, or to sell before the crash and buy new stocks after.
Warren Buffett offers a handy perspective with an edible analogy in his 1997 letter to shareholders:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.” 

Now let’s take a look at what investing strategies one could use to get rich during a stock market crash.

Buy shares of companies with true intrinsic value

During a stock market crash, share prices of almost all companies fall. However, this doesn’t mean that these businesses lose value! Think of it as stocks on sale.
Indeed, stock market crashes are the perfect time to buy more shares of your favorite companies that have a genuine value. You will be able to buy stocks cheaper than their normal price.
Since every market crash is followed by a period of expansion, the investments you made on sale will pay off. If you take a look at the chart below, the closer you invest to the through (which is the bottom of a crash), the bigger profit you will make!
Stock market crashes in the last century
Remember buying stocks comes down to buying a part of a company. A stock market crash may bring down the share price of the business but its intrinsic value won’t be subject to that level of fluctuation unless its industry is particularly hit by the recession.
For example, Amazon has a huge competitive advantage in its market and people won’t stop ordering things because of a recession. The share price will probably take a hit and people may order fewer things. However, they will still keep their advantage and once the recovery comes in, the customers will pursue their habits.

Beware of the length of the downturn because it varies a lot

The downturn can be short

When the market crashes, it’s best to act fast, because recovery can sometimes happen very quickly. For example, the late-August crash had the Dow down more than 6% in the morning but ending the day down only 3.6%. A few days later, the Dow surged more than 600 points – its third-largest gain ever!
In order to best position yourself to take advantage of a market drop, it’s smart to keep some of your portfolios in cash and to have a watch list of stocks that interest you. You can make this list for free on Yahoo Finance for example.
This way you can see the price movements of the stocks over time. When the market plunges, you’ll be able to easily see which stocks have fallen the most.
For an even more meaningful watch list, you can enter each holding at what you estimate its intrinsic value to be. So if you think Adobe Systems (ticker: ADBE) is worth $255 per share and it’s currently at $265, you can add it to your online portfolio as if you bought a share at $255. Then, every time you check the portfolio after that, you can immediately see how much above or below its intrinsic value the stock is trading for.

The downturn can belong

However, a market correction isn’t always short. An example would be the decade from the end of 1999 to 2009 which is referred to as “the lost decade.” Two bear markets followed each other during this period and the New York Stock Exchange-traded stocks averaged an annual loss of 0.5%.
That might make you think that some market downturns are to be greatly feared. Nevertheless, there’s an interesting and often overlooked fact: those who kept investing in the market eventually came out ahead!
Fidelity Investments, which manages the 401(k) accounts of millions of Americans, reported: “Even during a decade that included unprecedented volatility coupled with two of the worst market downturns in history, analysis of employed participants with a Fidelity 401(k) plan for the past 10 years (1999 to 2009) showed their account balance increased nearly 150% to $163,900 at the end of 2009 from $65,800 at the end of 1999. The increase in balance was due to continued participant and employer contributions, dollar-cost averaging, and market returns.”
It’s hard to go wrong if you keep adding to your long-term investments in the stock market, especially during downturns!

Short selling can be lucrative but risky

Short selling is another way to get rich during a stock market crash. It’s the art of profiting from falling prices. This risky strategy made George Soros’ name as “the man who broke the Bank of England”. There was even a major Hollywood film about it called “The Big Short”.
Indeed, short selling is like betting on who’s going to lose in a sports game. Short-sellers bet that a stock will fall in price. Short products offer great opportunities when share prices fall but are very risky!
George Soros pocketed $1 billion in profits after his short sale of $10 billion worth of Pound sterling in 1992. At the time, he was gambling heavily against the British pound because he was convinced it was overvalued.
Soros speculated that the Bank of England would either have to devalue the currency or withdraw from the ERM entirely. As the pound kept plummeting, the Bank of England pulled out of the ERM. and eventually, the currency lost 15% against the German mark and 25% against the US dollar. Soros walked away with a tidy profit.
Georges Soros, “The man who broke the Bank of England”

However, betting on falling prices is only for experienced investors and only a small part of one’s capital should be used.
“Only those who have already gained initial experience in the stock exchange and who have the time to keep an eye on their position, in order to make a speedy exit before the loss becomes too substantial, should invest in such products.” advises expert Lipkow.
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